Determinants of Fiscal Crises in Argentina: Soft-Budget Constraints and Divided Government

The mainstream literature on fiscal crises in Argentina has articulated two categories of explanations. First, the absence of hard-budget constraints has been mentioned at length, amounting to a sort of Achilles heel of Argentine political economy.^{Footnote 10} The Argentine revenue-sharing system has conspicuously burdened the federal government with taxing responsibilities, at the same time as subnational governments were granted expenditure capacities almost unmatched by their counterparts elsewhere in the world.^{Footnote 11} In fact, this disjuncture between spending and taxation makes Argentina one of the countries with the largest vertical fiscal imbalances in the world.^{Footnote 12} Adding to the resulting common pool resources’ dilemma fostering fiscal imprudence is the internalization of the negative externalities of provincial overspending by the national governments.^{Footnote 13} This overspending is facilitated by the availability of national and international credit for subnational expenditures, which often is secured using the revenue-sharing funds as a guarantee for future payments. The second category relates to the horizontal and vertical dimensions of ruling with a divided government. The former dimension concerns the absence of simultaneous same-party majorities in the executive and legislative branches of government, and the latter, more dramatically crucial to my central argument, to the distribution of partisan loyalties between central and subnational governments. Touted as a kind of “iron law” of Argentina politics, the greater political stability of Peronist incumbents allows them to keep their legislative and provincial dominance even when they lose presidential elections, assuring the almost unchallenged electoral advantage of the Peronist Party at the subnational level.^{Footnote 14} This tenet of Argentine politics is reinforced by the support base of the Radical Civic Union, the other leading electoral force, whose support bases draws on voters from relatively wealthier constituencies, who are geographically concentrated in the most populated provinces and politically disadvantaged provinces in federal fiscal politics.

Whereas these explanations have some kernel of truth, they fall short of accounting for the institutional complexity that lurked beneath the unruly fiscal scenario that triggered Argentina’s Great Depression of the late 1990s. In particular, these explanations had not paid sufficient heed to the effects of legislative malapportionment. Therefore, we contend that the political biases engendered by extraordinary high levels of malapportionment accrued fiscal distortions throughout the 1990s related to coalition-making imperatives driving national governments to be more lenient with the fiscal excesses of economically marginal but politically overrepresented regions. Fiscal decision-making amid recurring economic shocks, such as the 1989–91 hyperinflation, the 1994 Mexican crisis, and the 1998–2002 recession, stimulated the creation of oversized coalitions in Congress whose survival was contingent on the doling out of short-term compensations to those provinces that supported fiscal restructuring to deal with such shocks.^{Footnote 15} Whereas most provinces suffered fiscal loses from such restructuring, smaller, overrepresented provinces, which are more affordable to co-opt and politically predicable due to the entrenchment of partisan enclaves, have been given more latitude to pursue narrow provincial fiscal interests.^{Footnote 16} This suboptimal fiscal equilibrium faded away when, despite the support of the larger provinces ruled by the Peronist opposition, small provinces ruled by the Peronist Party sabotaged the last desperate move of the national government to cut down spending to ease the ongoing recession and probable debt default as a result of the Russian crisis of 1998 and the resulting devaluation of the Brazilian real. Further, the divided government thesis, insofar as it rests on the presumption of cohesive and integrated national parties and resulting partisan discipline in Congress,^{Footnote 17} has been gradually losing ground amid the increasing organizational denationalization and weakening of the programmatic national agendas of the Peronist and Radical parties.^{Footnote 18} With regard to the impact of soft-budget constraints, not withstanding their long-standing presence, they had not been decisive in exacerbating the ongoing crisis scenario because the East Asian currency crisis and the crises mentioned above deterred investors in developed countries from investing in debt-ridden Argentina, especially in its most vulnerable provinces. As a result, the available resource pool for overspending was already contracting dramatically. Consequently, the divided government and structural fiscal profligacy arguments cannot per se account for the exacerbation of the crisis that led to the Argentine fiscal collapse of the late 1900s unless explicit attention is paid to the effects of the legislative overrepresentation of small provinces.

The Limits of Analyses Based on Institutional Strength: Charting the Paradox of Malapportionment

The concept of institutional strength is widely used but often poorly defined in the literature on comparative politics and political economy. Characterizations range from a Weberian understanding of state institutions as the monopolist of legitimate violence and protectors of private property rights^{Footnote 19} to their ability to penetrate deeply into society and effectively regulate the social, economic, or political behavior of citizens.^{Footnote 20} Institutional strength has been associated with ideational innovation,^{Footnote 21} “veto points” or “strategic openings,”^{Footnote 22} and implementation capacity.^{Footnote 23} While most of these perspectives share some tacit understanding about the significance and causal role of political institutions, they seldom refer explicitly to the notion of institutional strength, nor do they identify its concrete and measurable indicators.

To fill this analytical vacuum, the concept of institutionalization has often been employed as a proxy of institutional strength, mostly drawing on Samuel Huntington’s definition of institutionalization as “the process by which organizations and procedures acquire value and stability.”^{Footnote 24} In the same vein, North claims that institutions reassert themselves by “providing a structure to everyday life,” generating a scenario that is not easily modified.^{Footnote 25} These heuristic characterizations have, however, translated into more rigorous and precise scrutiny in research on legislatures and political parties. First, building on the seminal study by Nelson Polsby on the U.S. Congress, analysts have shown that legislatures institutionalize through professionalization, namely when boundaries for roles, internal complexity, and universalistic criteria are well established.^{Footnote 26} Second, party institutionalization takes place when “citizens and organized interests must perceive that parties and elections are the means of determining who governs, and that the electoral process and parties are accorded legitimacy.”^{Footnote 27} Institutionalization then connotes the process of consolidating a democracy and presages responsible policymaking. Put simply, while this scholarship on institutionalization diverges in the object of study, there is one factor it agrees upon: insofar as institutionalization amounts to ascertaining and entrenching the “rules of the game,” it is adjoined by positive developments and performance.

Levitsky and Murillo provide perhaps the clearest characterization of institutional strength. They identify enforcement and stability as two central dimensions to assess institutional strength. Accordingly, formal institutional arrangements that persist in substance and over time are deemed strong. In practice, this suggests that when said arrangements withstand adversity and endure, actors and groups become increasingly aware of the effect of institutional rules on their interest and, concomitantly, learn how to organize to cope with institutional effects, even the unintended ones.^{Footnote 28} Such unplanned effects are of course the result of cognitive limitations as well as changing social contexts. Blundered human calculations and evolution aside, institutional dynamics may engender vicious practices, especially when key actors protected by institutional veto points control the process of institutional adjustment. In his seminal contribution to institutional analysis, Pierson admits that unintended effects are not randomly distributed and often stem from the entrenchment of sectorial and territorial concerns. This entrenchment is part and parcel of the path-dependent nature of institutional design and the ensuing encapsulation of vested interests.^{Footnote 29} In turn, unintended consequences of institutional design are not only inevitable but often are reinforced by the fact that designers create rules that make the preexisting arrangements hard to reverse. Furthermore, Pierson convincingly reminds us that policy legacies are important. While political decentralization is a necessary condition for federal arrangements, significant institutional differences are at play. Several examples can be cited at length, but suffice it to contrast the U.S. and Argentine rule for electing senators. Although in both cases the interests of the subnational governments received considerable attention in the process of institutional design, the Americans have tempered the state’s preeminence by requiring the popular election of senators in the early 1900s, whereas Argentina followed suit almost a century later following the 1994 Constitutional Reform. Moreover, the importance of provincial-level decisions in the selection of candidates to the National Congress underlies the facade nature of said reform insofar as voters, in absence of primary elections (only adopted following the 2009 law 26.571 promoting the democratization of political party nominations), have no significant latitude in the process. As I will show, the tight control of Argentine legislators by provincial party leaders has dramatic spillover effects on the nature of fiscal policies.

Consequently, it is not far-fetched to claim that institutional strength may well encapsulate obsolete and malfunctioning features of politics. Let us focus, for instance, on institutional arrangements based on statutory and constitutional principles. Considering that the difficult-to-amend character of constitutional institutional arrangements is part of the need to protect their higher law character and that special majorities are often required in multitiered polities,^{Footnote 30} we should not be surprised about the enduring institutional legacy of the U.S. Great Compromise of 1787, which set the historical paradigm of granting each state equal representation in the Senate. However, a substantial empirical literature provides evidence that, beyond the point of whether overrepresentation is the result of the impartial protection of minority rights or rather stems from political negotiations, the legislative overrepresentation of the smallest units generates suboptimal outcomes in terms of fair economic distribution and performance. Institutional persistence amid increasing demographic change translates into lopsided politics, suggesting that the immense and rising variation in state population led Senate apportionment to grant disproportionate weight to small-state voters in determining the composition of the Senate and the distribution of federal funds.^{Footnote 31}

While the deleterious effects of this historical landmark decision on U.S. politics are well documented,^{Footnote 32} it is important to bear in mind again some significant comparative insights. While Argentina has never opened any permanent institutional channel in its political process for discussing and eventually amending the most evident and worrisome aspects of territorial overrepresentation, the American experience has been different. The intervention of the Supreme Court and its decision in Baker v. Carr in 1962, ordering legislatures to reapportion, meant not only that legislative malapportionment began to win recognition as a national political problem to be addressed, but also that the judiciary would eventually steer the politics of reapportionment set in motion by said radical decision. In short, the Gordian knot of territorial institutional design is, borrowing from Pierson, vested in the inherent propensity of constitutions to disallow certain types of revisions altogether, insofar as they provide veto power to those regions that would lose protections or privileges as a result of possible reforms.^{Footnote 33}

The Significance of Malapportionment

Commonly referred to as malapportionment or overrepresentation,^{Footnote 34} the unequal representation of the population in at least one chamber of the legislature has emerged as a historical compromise in the formation of the nation or union to balance the representation of people and of the regions. While normatively sound insofar as it redresses the economic and demographic vulnerability of smaller jurisdictions, the deviation from a proportional population-based standard represents not only a serious institutional problem but also leads to the “devaluation” of the vote.^{Footnote 35} Other deleterious effects of malapportionment stem from enabling local bosses to hold the national government hostage on important policy issues. Moreover, malapportionment has profound politico-economic significance because it “assigns” disproportionate benefits to overrepresented units.

In fact, an extensive empirical literature confirms that legislative malapportionment not only has a decisive effect on the coalition-building efforts of executives at the central and subnational level but also substantial and direct consequences on the quality of the political system. While in its origins malapportionment provided territorial institutional protections for regionally based elites against the growing influence of the metropolitan areas, among its unintended consequences is a fairly broad range of issues affecting political dynamics. Malapportionment can lead to estrangement between executive and legislative branches insofar as it exacerbates partisan biases that eventually “prevent” redistricting efforts.^{Footnote 36} While originally seen as countervailing rural political power in the United States and Canada,^{Footnote 37} malapportionment weakens progressive forces and bolsters patronage-dependent forces, undermining the ability of national-level incumbents to implement and consolidate democratic reforms in Latin America. In this regard, malapportionment has played a central role in the “deadlock of democracy” in Latin America.^{Footnote 38}

With regard to the purported effects of legislative overrepresentation on public policy, it is thought to have deleterious consequences on national public finances. The overrepresentation of the smallest units not only empowers the legislators of said units to coalesce in demanding policy concessions to the expense of populous states but also may generate suboptimal outcomes in terms of fair economic distribution and performance. Legislative apportionment is central for distributive politics because “senate coalitions are likely to prefer to distribute funds in ways that disproportionately benefit constituents in less populous states even in the absence of conflict between large and small states.^{Footnote 39} The underlying logic is that overrepresented, often economically vulnerable, units are more affordable coalition partners because they can be co-opted at the least cost while still providing the same political assets that richer jurisdictions provide.

From the standpoint of the structure of incentives of subnational governments, malapportionment decisively conditions the nature of intergovernmental exchanges insofar as it makes overrepresented provinces more attractive for coalition building and hence it may play a tiebreaker role when the center is unable to steer majority support in the legislature. The experiences of Argentina, Bolivia, and Venezuela provide preliminary evidence to the connection between Senate overrepresentation and the subnational origin of national fiscal disarray. While to some extent windfall resources from oil in the latter case offset fiscal distress, subnational assertiveness in the legislature amounted to co-optative, patronage-ridden intergovernmental relations in most cases. All else being equal, peripheral, transfer-dependent jurisdictions in these countries have clearly signaled their preference for a centralized fiscal system based mostly on transfers and bailouts from the central government. The resulting outcome is increasing potential for subnational overspending and fiscal crisis.

Some theoretical considerations, however, should be kept in mind. Unless reapportionment reforms take place, malapportionment can only be affected by demographic shocks such as migration or changes in the size of the overall population. In essence, these shocks occur infrequently. Hence, malapportionment cannot singlehandedly be a cause of policy developments or fiscal crises. For that reason, this article articulates an institutional explanation of the fiscal crisis that takes into account the mutually reinforcing interaction of biased territorial representation and partisan influences. Drawing on Arend Lijphart’s finding that electoral malapportionment and the effective number of parliamentary parties are negatively correlated,^{Footnote 40} I argue that precisely legislators from overrepresented provinces are more shielded from the effects of electoral accountability than legislators from provinces with more parties competing for regional support. In this vein, as I will subsequently show, legislators from the former provinces could confront the national executive in times of extreme fiscal circumstances without much concern about jeopardizing their political survival. In sum, rentier politics and the resulting putative electoral immunity acted together with the enduring strategic incentives rendered by legislative overrepresentation.

The “Enigma” of Argentine Economic Development: Fiscal Consequences of Biased Provincial Representation

Argentina in the early years of the twentieth century was one of the most affluent nations in the world. The per capita income was on a par with West European countries such as France and Germany and matched those of Australia and Canada. In contrast, while many economies experienced exceptional growth after World War II, Argentina has grown erratically, with long periods of stagnation and recession. This weak economic performance reached dramatic proportions when in the early 1990s unprecedented hyperinflation turned Argentina into one of the worst cases of macroeconomic meltdown in recent history. While the economic literature has attributed this economic decay to populist macroeconomic policies and abusive expansion of state capacities,^{Footnote 41} the emerging consensus among many researchers is that the fiscal crisis was precipitated by the maintenance of subnational patronage networks and was determined by the varying capacities of provincial governments to adjust their public finances.^{Footnote 42}

Argentina stands out as one of the federations with the world’s highest level of malapportionment. As shown in Table 1, the Stepan-Swenden federal data bank scores the Argentine Senate with a Gini Index of Inequality of 61 percent, nearly doubling the scores of Germany and Canada and well above decentralized federations such as the United States and Brazil.^{Footnote 43} With regard to the policy scope of the territorial chamber, Argentine bicameralism is highly symmetrical, furnishing the Senate with authority to approve presidential nominees and advisers, authorize the president to declare an emergency rule in case of foreign military attack, and appoint judges that assess federal expenditures. More crucially from the perspective of this article, all revenue-sharing bills and federal co-responsibility fiscal laws must originate in the Senate. While the lower house normally has greater authority in originating money bills, general tax laws, troop recruitment, and others, revenue-sharing bills (including federal transfers) are controlled by the Senate. Additional senatorial prerogatives can be cited at length, but the encapsu-lation of federal fiscal issues at the upper-chamber level suffice to highlight why this house is the institutional point of reference to uncover the politicization of these issues.

Table 1.

Senate Overrepresentation (Stepan/Swenden Data)

Source: Stepan (2004) and author’s own calculations.

Note: Higher values denote higher malapportionment.

The Argentine legislative system then overrepresents poor and underpopulated territories more than most federal systems. As indicated above, its Senate ranks highest on a scale of territorial overrepresentation among the world’s upper chambers. Concretely, this means that the peripheral, most unpopulated areas, with roughly 30 percent of the national population, have held forty of forty-eight seats in the Senate (83 percent of the total). According to Gibson and Calvo, only one of the nineteen peripheral provinces has more than 10 percent of the population of Buenos Aires. Yet with 40 percent of the population, Buenos Aires province holds 4 percent of the Senate seats.^{Footnote 44} This overrepresentation also pervades the lower chamber, where proportionality is supposedly substantiated, insofar as the overrepresented regions hold roughly 35 percent of the eligible electoral population but hold 50 percent of the legislative seats. Reynoso compares the ratio between the votes and seats in Buenos Aires and Tierra del Fuego, the most and least populated provinces, respectively. He shows that, while in the 1993 election, in order to obtain a seat, Buenos Aires needed ten times the number of votes needed by Tierra del Fuego, it needed fourteen times more for the 1995 legislative elections.^{Footnote 45} This amounts to a yawning gap that by far exceeds the original federal normative purpose of compensating peripheral areas due to their demographic vulnerability. The summative effect of overrepresentation in both chambers of Congress accounts for the tilted, nonproportional nature of intergovernmental fiscal relations in Argentina, couched as a case of “reallocative federalism.”^{Footnote 46}

The Argentine Constitution of 1853, which originated in the constituent assemblies of Parana and Santa Fe, established that seats in the low chamber would be allocated proportionally to district population. However, this principle was forsaken when the 1949 Constitutional Reform, under the leadership of Juan Domingo Perón, introduced an amendment whereby a minimum of two congressmen per province would be elected, regardless of their population. This distortion was further increased to a minimum of three congressmen by General Alejandro Lanusse in 1973 and to five congressmen by General Reynaldo Bignone in 1983, before the government was transferred to civilians. Thus, the representation of the traditionally conservative peripheral, that is, hitherto historically overrepresented regions in the lower chamber, was unreasonably boosted. In the case of the military, the rationale is that, by manipulating legislative apportionment to overrepresent districts where the elite is dominant, the military regime secures the political and economic interests of its strategic allies once democratic elections take place. This kind of garrison reapportionment has exacerbated the already documented built-in representational bias in the Argentine Senate. Regarding the apportionment of the Senate, this has changed over time. The Constitution of 1819 assigned one senator per province, while the Constitution of 1853 allocated two. In 1973, it was increased to three senators per province, which has been maintained since then. As can be seen, most of the amendments had only intensified the territorial representational asymmetries in Argentina, affording a sort of historical inevitability of blackmailing poor provinces to gain federal resources and conduct patronage politics without fiscal restraints.

The fiscal correlate of this representational conundrum is the disjuncture between national-level fiscal adjustment reforms and provincial-level overspending, which contributed to Argentina’s 2001 economic crisis, the worst since the Great Depression of the 1930s. This fiscal behavior is also contextually related to a long-standing history of provincial obstruction of economic reform initiatives of the central government.^{Footnote 47} However, the provinces have varied widely in their willingness to sustain these reforms. Although some quickly cut public-sector employment and overall spending like Mendoza, others, like Rio Negro, have done none of the above, leading to severe fiscal imbalances and extensive indebtedness. It is instructive to point out that while both provinces have relatively similar levels of economic development, the latter is considerably more overrepresented in both legislative chambers. Thus, the kingmaker role played by poor (i.e., transfer-dependent) provinces has induced an overspending bias across jurisdictions as these provinces have tried to overuse the national common source of revenue, since provincial spending is financed from taxes collected by the central government. Concomitantly, most attempts at implementing fiscal responsibility measures have proved to be unsuccessful.

Sabotaging the Fiscal Rescue Plan: Perverse Redistribution as the Achilles Heel of Argentine Federalism

By the end of the 1990s, Argentina was a sort of poster child for “Washington consensus” economists and policymakers. Less than three years later, the country found itself in an unprecedented economic depression that alarmed international lenders as well as pundits concerned with the political impact such a crisis might have on a still-consolidating democracy. Argentina’s economic crisis has then led to the search, typical of such spectacular cases, for the supposed causes of its experience. Among the conclusions that some writers have drawn are that currency boards and fixed exchange rates are very risky and external shocks have precipitated a steady decline in the influx for foreign capital.^{Footnote 48} The currency-board-like Convertibility Plan that the Argentine government had adopted in 1991 was spectacularly successful in reducing inflation. However, fixing the value of the Argentine peso to the U.S. dollar resulted in an overvaluation of the peso. According to this perspective, this overvaluation made the Convertibility Plan unsustainable, and the inevitable collapse of the plan produced the current crisis. Concomitant to this problem, the East Asian currency crisis of 1997–98 and the Russian currency crisis of August 1998 made investors in developed countries much more cautious about investing in developing countries in general. Brazil, Argentina’s largest trading partner, withstood a currency crisis in 1998 by allowing its currency to float freely, thus making the Argentine peso much less competitive.

The explanations mentioned above are correct in emphasizing the interaction between domestic monetary supply and foreign factors, namely that an overvaluation of the Argentine peso after the devaluation of the Brazilian real in 1998 produced unsustainable trade deficits and led to the crisis. Yet there is a wide consensus from both national and international analysts that the most dramatic deficit, and the one that ultimately made Argentina’s acclaimed economic model unsustainable, is the one brought about by the demand side of the equation, especially that of political origin.^{Footnote 49} The difficulty of enforcing fiscal discipline transpired as the central parameter, resulting from the inability or unwillingness of controlling deficits and limiting provincial indebtedness. Neither the second Menem administration (1995–99), negatively affected by the rising economic costs of Convertibility Law, nor the subsequent De la Rúa administration were able to enforce fiscal discipline because of their eroding political clout and the concurrent relative strengthening of the provincial governors.^{Footnote 50}

Several factors motivated the lack of political consensus to control the fiscal deficit. First, spending on pensions and salaries of government employees, including superfluous employees, comprises a larger part of the budget than is desirable for a country at Argentina’s level of economic development. More worrisome, most of these jobs are located at the subnational level, whose monitoring becomes more difficult than those present at the central government level.^{Footnote 51} Second, once the partisan affiliation of governors is added to the representational biases, a truly complex picture emerges. In a previous study, I show that overrepresented provinces ruled by governors who belong to parties different from the one that controls the national executive can bring into play their representational advantages to attract shares of federal transfers beyond social welfare criteria.^{Footnote 52} Third, the delegation of provincial taxing authority to the federal government and the transfer of expenditure responsibilities to the provinces resulted in significant fiscal imbalances by the end of the 1990s.^{Footnote 53} Federal revenue sharing weakens the link between the taxes provinces levy and the revenues they spend. The federal government has not been willing to get tough with provinces that are essentially bankrupt. As a result, the provinces face weak financial discipline.

This unruly panorama of fiscal indiscipline was nonetheless addressed by the national government in its quest to meet the agreements with the International Monetary Fund to allow Argentina to receive credit lines in order to weather fiscal emergencies.^{Footnote 54} In turn, crucial developments occurred between 2000 and 2001. These relate to the plan of the La Rúa finance minister, Jose Luis Machinea, to adopt a battery of hard-line tax measures and the reduction of 1.2 billion pesos in public current spending.^{Footnote 55} As noted above, the central government negotiated from a weakened position because it could not count on disposable public resources to co-opt the provinces and lure them into accepting a disadvantaged deal. Additionally, most of the provinces were ruled by the opposition Peronist Party. Given these constraints, Machinea offered a lump sum that would be paid in advance to temper the putative effects of the fiscal reform. Nevertheless, the Peronist opposition has played out unevenly; while the larger Peronist-ruled provinces such as Buenos Aires, Santa Fe, and Córdoba cooperated with the government initiative, the smaller and poorer (i.e., overrepresented) Peronist provinces of Formosa, Jujuy, Misiones, and Santiago del Estero rejected the deal, maintaining previous budgetary limits almost intact and shielding themselves from new austerity measures.^{Footnote 56}

To offset the increasing fiscal distress, the provinces reacted by issuing their own quasi-monies to make up for funds they would not be able to receive. While the provinces always issued complementary currency in the form of bonds and drafts to manage shortages of cash, the scale of such borrowing reached unprecedented levels during this period. However, these quasi-currencies were mostly issued by the rich province of Buenos Aires, known as the Patacón, and the national government that circulated the LECOP (Letra de Cancelación de Obligaciones Provinciales, Letter of Cancellation of Provincial Obligations), buttressing the appeal of poorer provinces to obtain federal funding for maintaining previous spending limits. In fact, while fifteen out of twenty-four provinces issued some sort of quasi-currency, the provinces of Buenos Aires and Córdoba released about 80 percent of the total. Likewise, with the exception of Santa Fe, which issued no quasi-money, the other most populated provinces of Mendoza, Tucuman, and Entre Rios ranked next. Thus, five out of twenty-four provinces accounted for nearly 90 percent of the total amount of funny money available in the country.^{Footnote 57} The underpopulated provinces, lacking such parallel currency in cases such as La Pampa and San Luis, or just counting on a very limited minting like Formosa and La Rioja, kept exerting pressure bilaterally on the federal government to maintain previous levels of public spending, mostly in state-related jobs and pensions, to make up for the scant financing options available to them. This has certainly been the case in San Luis, which additionally negotiated a currency basket separately with the Chilean money-minting authority (Casa de la Moneda) that included the Chilean peso, the Argentine peso, and their own quasi-money. More prosperous overrepresented jurisdictions like oil-rich Santa Cruz resorted to equivalent yet more aggressive steps, as they threatened to cut off the provision of gasoline and natural gas to the rest of the country unless the tax on oil exports was severely reduced. Likewise, anticipating an impending freezing of deposits by the federal government, Santa Cruz deposited the provincial reserves in Luxembourg and rejected pleas from De la Rúa to bring back the money to the country.^{Footnote 58} Very tellingly, Néstor Kirchner, the then-governor of Santa Cruz, was to become Argentina’s president in 2003, to be succeeded by his wife, Cristina Fernández de Kirchner, in 2007. Put simply, overrepresented provinces resorted to diverse tactics, based on their structural endowments, for prompting the federal government in times of fiscal emergency to pursue their narrow territorial interests.

As a last resort, President Fernando de la Rúa appointed Domingo Cavallo, the architect of the Convertibility Plan during the Menem administration, as economics minister. Cavallo presented a new economic plan in Argentina’s Congress. In March 2001, however, the Congress, through a coalition of the legislators representing overrepresented jurisdictions, refused to allow Cavallo to cut government salary and pension costs, and the government sold debt to cover the deficit. In December 2001, the government defaulted on its debt and in January 2002 abandoned the Convertibility Plan. The distorting nature of Argentine federalism once more prevailed. Federalism and its concomitant institutional protection of the autonomy of subnational units can at times have perverse effects on fiscal performance. Despite federalism’s ostensible “market-preserving” quality, deadlocked and malfunctioning federal institutions can lead to economic catastrophes.